Abby Burns (00:02):
From Advisory Board, we are bringing you a Radio Advisory, your weekly download on how to untangle healthcare's most pressing challenges. I'm Abby Burns. We are officially in the full swing of 2025, and I don't know about you, but it feels like this year has started off at a sprint. There are all sorts of things vying for executive attention this year. So in the next two episodes, we're going to focus on the handful of things healthcare CEOs need to have on their radar in order to make better, smarter decisions this year. That's a tall order, so we've divided our conversation into two parts. For today, I want to explore a pattern we've been observing and that is how growing pressures in the healthcare industry that we are all too familiar with are forcing healthcare stakeholders to make significant pivots in their strategies and how these pivots are having ripple effects on the very power dynamics between market players.

(00:59):
If you look for it, you can see this pattern playing out all across the industry. Today, we're going to focus on three areas in particular. We're going to look at the upheaval in the Medicare Advantage market, the controversy around drug spend and PBMs in particular, and we're going to talk about data, which has become one of the most important strategic assets healthcare organizations have, but arguably also their biggest security risk.

(01:24):
Next week we'll turn our attention to the policy landscape and to health systems. To help us unpack all of this, I've invited the leaders of Advisory Board's 2025 state of the industry research, Natalie Trebes and Max Hakanson. Hey, Natalie. Hey Max.

Natalie Trebes (01:39):
Hi.

Max Hakanson (01:40):
Hi there.

Abby Burns (01:43):
So you all and your team have a pretty gargantuan task each year, which is to look deeply across the sectors within healthcare and true to the name of your research, ask the question, what is the state of the healthcare industry in 2024, in 2025? Believe it or not, you'll soon be gearing up for 2026. Natalie, you have what is maybe my favorite analogy for this particular moment in time in the healthcare industry. To help set the tone for the conversation, can you share that with us?

Natalie Trebes (02:15):
So we got to go back in time well before she was Time Magazine's person of the year in 2023, Taylor Swift was downtrodden, I would say. Relative to where she'd started, she had a great rise and relative to obviously where she is now on top of the world, doing a multi-year massive record-setting tour, she had a bad couple of years. She pulled all her music off of Spotify in 2015, some payment disputes. She had the whole public spat with Kanye West. There was a big backlash against her, #taylorswiftisover trending on Twitter, she went into hiding, but more importantly from a business standpoint, her albums were not selling as much as her previous ones. This is a real problem. And then in 2019, Kanye's old manager bought her master recordings from her first six albums from the record company she worked with.

(03:10):
So altogether a flurry of what I would call growing pressures, and we'll come back to that theme on her entire career position. Then in 2021 coming off of some lower performing albums, Taylor tried her performance pivot. So she decided to take a gamble, re-record all of her old albums so that she could officially own the new masters. I want to emphasize this is a huge gamble because it was taking time off from recording new music to do this. She financed it herself and biggest gamble of all, it completely depended on her fans to choose to buy and stream the new versions instead of the old ones. And unbelievably it worked. You know the rest. We're living in Taylor Swift's world now, probably a lot of listeners have shelled out a pretty penny to go to her tour or for their kids and for record companies, I'll bring it back to us here, there has been a power dynamic evolution, totally new element to negotiate in future recording contracts with other artists.

(04:14):
So there are changes to what fan engagement means and there's a lot of debate about whether that is good for other artists or not. But inarguably, it has cemented Taylor's unprecedented status. So the things I want to highlight from that, it's not just the response to the pressure, but it is how she responded. It was about knowing her own strengths and her assets and her fan base and the way she responded has changed the industry for everyone else. So that's the story that I think we're seeing in healthcare now if I can make that stretch.

Abby Burns (04:50):
I love this example and not just because I happen to also love Taylor Swift, but because I do think it is a good analogy at every step of the equation for the healthcare industry. So I want to actually transition us now back to healthcare and some of the places we're seeing this framework of pressure, pivot, and crucially power evolution unfold because I think there are several. And to help sort of make this framework tangible, I want to start with something that all of our listeners are familiar with, not just because Max was here on the podcast talking about it back in October, but one of the most dramatic things that we saw take place last year were what I'll call the MA breakups right? At this point, more than 20, probably more than two dozen health systems have terminated one or more, some even all of their contracts with MA plans. We've talked about this before on the podcast, but I want to look at what's happening here through this lens of pressure, pivot, power evolution. How would you apply that framework to the MA breakups?

Max Hakanson (05:56):
It's a great question because it's definitely a very exciting area to watch, and you can look at this both from the provider lens or the health plan lens, but they're obviously interconnected when you are looking at this changing dynamic. So really the growing pressure is unsustainable payment rates for those providers. They feel like they're not getting paid enough from health plans. They're also facing more utilization management, specifically prior auth, higher denial rates than we had seen in past years. Now, health plans are instituting this because they're also facing headwinds, a decrease to the effective benchmark rates, lower star ratings than we were seeing back in 2022 and 2023, and obviously higher utilization, elevated costs for them. So they are pushing some of that pressure onto providers. Providers don't think they're getting paid enough to deal with this increased cumbersome prior authorization and utilization management. So they are starting to shake up what the contract arrangements actually look like.

(06:59):
In the past, most providers would work with the majority of Medicare Advantage plans in their region. We're starting to see a change there. They're starting to, as you mentioned, terminate some of those contracts cut the hardest to work with performers. They're not getting out of it completely. For most it is untenable to leave Medicare Advantage, 54% of seniors in this country are on Medicare Advantage. So you can't get out of it completely, but you can pivot, you can start terminating some of those contracts and that's where we see this new power dynamic emerging or evolving. Are you going to cut the worst performers? Are you going to partner with your best performers? What is that new power dynamic emerging? And it puts a little bit more power in those provider hands. Historically, the health plan held a lot more of that power. We're starting to see a little bit of a shift there.

Abby Burns (07:51):
Yeah. And Max is this exclusive to Medicare Advantage?

Max Hakanson (07:57):
I would not say it's exclusive, but it is definitely the area we have seen the most action. We're starting to see some dabbling, I'll say in the commercial employer sponsored landscape as well. Employers are feeling those cost pressures. They're seeing huge increases to their healthcare costs and they're saying, "This is untenable. We can't sustain this." However, there are a lot of challenges to breaking up those contract dynamics in the employer sponsored landscape. Systems have lots of different provisions, all products, clauses, things that make it really tough to be cut out of the network. And a lot of times the insurers simply cannot get rid of those providers from their network. So it makes it really tough. So I think there's a lot of desired action, but it's been really tough to actually make happen in the employer space.

Natalie Trebes (08:44):
Yeah. And when you compare the financial situation of both of those, I think in Medicare Advantage, the financial pain has been brought by CMS and Congress over the couple of years, and so that is put onto insurers and translated to providers. And so Medicare Advantage is becoming a less lucrative payer for providers, and so they cannot afford to take as many haircuts. They have to make those choices. In the commercial space, commercial payers have historically been just paying higher rates, and so providers are still willing to work with them there. The providers are not the ones who want to break up, and it is the employers who have been footing the bill and are starting to poke around the edges there.

Abby Burns (09:30):
So the market pressure that you're pulling out is what we've talked about before right? It is the tension between the payers and providers, the administrative burden of managing the relationship, managing the requirements on the provider. It is the high cost on both sides of the equation, both on payers and on providers. Max, you started to talk about the power dynamic shift that we can expect to see, and I'd love to just dig into that a little bit more. How do we see providers in particular changing the way that they do show up in their relationships with plans?

Max Hakanson (10:05):
Yeah, there's two things I want to highlight. I think there's the carrot or the stick approach here. The stick approach is going to be contract terminations. It's going to be cutting you out of your network saying, "Unless we can get X and Y, whether that be rate increases, whether that be changes to how we work on utilization management, how we can reduce some of those abrasion or friction points, we are going to terminate you from our network."

Abby Burns (10:28):
Which to your point, Max, that can be really hard, especially you mentioned 54% of seniors are covered by Medicare Advantage. In some markets that number is significantly higher. So that's not always the best option on the table.

Max Hakanson (10:40):
Yeah. And that gets you to the other side is tiered relationships and really dedicated partnerships. How can we work better with those health plans that have similar goals to us that want to be good partners? And so I think a lot of attention gets focused on that termination side. It's more newsy, but there's so much happening in that partnership side because Medicare Advantage is here to stay. It's continuing to grow. You mentioned how many seniors are on it, so we're going to need to see some real partnerships between the two if they want to make this work and continue to be profitable and continue to operate in the space.

Natalie Trebes (11:13):
Yeah, there's a tension between how much is the action about minimizing pain versus how much is the action about maximizing gain. And I think the terminations are, "I just want my worst problems to go away," and Max is talking about let's start thinking about the longer term capabilities we want to build and where we want to set ourselves up for in the future. And the way that that is going to affect the entire industry is people are starting to place bets of who they think their best strategic partners are now, and you need to be thinking on that longer term horizon.

(11:51):
So bottom line, we are all used to a very broad network that looks pretty consistent across different business lines, different purchasers, different provider types. And as all of these organizations and sectors deal with the cost pressures and are trying to find preferred partners and get rid of their least preferred partners, that makes the networks across different segments or organizations look a little different from each other. And so you're going to see providers trying to transform into something that makes the most sense for their preferred partners. You're going to see networks get a little smaller and plans focus more on navigating patients throughout rather than the free for all that I think we've had over the last 50 years.

Abby Burns (12:42):
If we're talking about major pressures that are driving healthcare stakeholders to act differently, that are causing ripple effects in the power dynamics within the industry, we have to talk about drugs. And this is not a new conversation that we're having. One of the things we talked about in the fall was drug negotiations coming out of the IRA and how those are shaping up for 2025. But I want to take a look at this part of the industry. Natalie, what are the major pressures when it comes to drugs?

Natalie Trebes (13:12):
Well, you of course mentioned just cost overall. It's probably helpful to kind of break that apart. So we've got our existing more traditional medications that have just been slowly creeping up in cost, and that's why we're seeing all those pushes for negotiations. Then we've got the portfolio of ever expanding new types of treatments, and these are the things that are ultra high cost or personalized cell and gene therapy on and on and on. We've just seen so much of a pivot from pharma over the last decade into more and more specialized niche treatments, which is amazing. I don't want to discount that, but it costs money and it's costing money in ways that our industry is not necessarily set up to absorb and finance. And so far the solution has been employers, you got to get reinsurance and those premiums just keep going up every year, too bad.

(14:10):
And so there's a lot of pressure and conversation around how are we going to rein in this spending? And that is the purchasers really asking everyone in the pharmacy space to work on that for them. And so that is the pharmacies, whether they're independent or owned by health systems or owned by PBMs, that's the PBMs themselves, that's the manufacturers, that's the health plans. All of them are being asked to help bring costs down and they're businesses, they would like to keep their businesses and bring someone else's cost down. They want to get paid to help employers and purchasers save money. So that's our conundrum.

Abby Burns (14:51):
Natalie, I'm glad that you mentioned health system-owned pharmacies because when we talk with health system strategy leaders, health system CFOs, specialty pharmacy is coming up more and more as one of the crucial lifelines essentially to their operating margin in a way that it just wasn't, let's call it five, 10 years ago. So I think you're approaching this from the cost side of the equation, which absolutely makes sense. But what we're also seeing is different stakeholders trying to grab the pharmacy revenue. There's a lot of money in the drug space. How can I capture a part of the pie? So systems are maybe a little bit newer on this jump. Who in the industry is doing that particularly well? And I think I know what you're going to say, but let me just ask the question.

Max Hakanson (15:39):
TDMs, they have diversified their business. They have gotten into new areas within the drug realm. They have been the ones that have been very innovative and iterative in terms of changing their business model and capturing new drug revenues.

Abby Burns (15:55):
Well, and I think that's sort of by nature of what has happened over the past decade, which is that they've come under scrutiny. They have been pressured over time. And what we've seen is they're able to pivot, diversify the business model, to your point, to capture different slices of the pie.

Max Hakanson (16:13):
These are not the PBMs of yesteryear. If you go back to 2012 where they're making over half their revenue from rebates and spread pricing, that's not what it looks like anymore. They pass along those rebates to their employers. Now they make most of their revenue from fees on specialty pharmacy and fees on their GPOs, their group purchasing organizations. They have really changed that as they pass along those rebates to their employer clients.

Abby Burns (16:38):
So I have a question here that might sound silly, but when we think about different stakeholders are trying to capture part of their revenue, part of the pie as we've been saying, can you give me a lay of the land of the competitive dynamics? Is it possible to catch up to them?

Natalie Trebes (16:54):
So I think the important thing to keep in mind is yes, PBMs have dominated the drug purchasing and negotiation landscape of 10 years ago, but we are making this evolution into new types of margins, new revenue streams. And so they are just at the beginning I think, of really transforming what does it mean to have a preferred specialty pharmacy that's aligned with an insurance product design and is able to steer patients to certain formulations of a drug over others. And so all of this is about new services for reducing drug costs while enabling access to those drugs for purchasers. So that is something that PDMs are working on doing, but it's also something that health system owned specialty pharmacies can be working on doing as well.

Abby Burns (17:51):
And that gets to my final question here, which is how long can PBM sort of primacy here last, given we know there's a lot of scrutiny and PBM reform being floated, what are we likely to see play out over the next year?

Natalie Trebes (18:09):
You're certainly seeing pushes on the infrastructure and assets and business model that PBMs have, right? Congress has proposed some legislation, something really dramatic last year that didn't make it in the end of year package around not allowing PBMs that have an insurance arm to also own a specialty pharmacy. So that is a big question mark that raises a lot of eyebrows for people.

Abby Burns (19:42):
Max, Natalie, when we think about sort of the core question of this conversation, which is what do CEOs need to know for 2025, how to operate in a world where sophisticated cyberattacks are just a guaranteed cost of doing business? It feels like a really, really important item on that list, and it's one that I think even two years ago was certainly on the list of the CIO, the chief information officer, but not necessarily the list of the CEO. Help us understand sort of the landscape around cyberattacks and how they're going to look tomorrow compared to yesterday.

Natalie Trebes (20:23):
When we look at cyberattacks, I think we anchor around some nefarious actor has hacked into a health system with a lot of patient records or an insurer with a lot of patient records, millions, tens of millions, hundreds of millions. In a certain case, the anchoring is that's patient privacy, that's data that can be held hostage and ransom backed, and that felt very contained to that one organization. And the landscape we're in now is a little bit different. Partly because holding a particular information system or data for ransom hostage now doesn't just mean you've breached privacy, but it means that operations for a healthcare business are stopped because we have so many on digital technologies to process patients and deliver care, and importantly, bill for care.

(21:19):
So we've halted the business of healthcare and then they've also changed in that they're no longer contained to one organization, but we have so many different vendors and data sharing happening between organizations that the spillover is vast and so many different organizations together are affected by a breach of one. And it doesn't have to be nefarious per se. It can also just be a software issue. We saw that with CrowdStrike. So there's a lot of different interdependencies and interconnectedness here that open us up and we are vulnerable in bigger ways than we were before.

Abby Burns (21:54):
Yeah. For anyone that doesn't remember, can you remind us what the CrowdStrike attack was?

Max Hakanson (22:00):
Yeah. CrowdStrike, which is a cybersecurity vendor that works with a lot of different companies across the world, they had a software update that went awry due to some bugs in the system, which led to a lot of companies not being able to operate. It hit the airline industry, it hit the groceries, and it certainly hit health systems and providers.

Abby Burns (22:21):
Yeah. The image that comes to mind for me is looking at an airport and you do see blue blank screens all down the terminals, very memorable. I think this interdependency point is a really good one that hits home. How does it affect how healthcare organizations need to approach cybersecurity?

Max Hakanson (22:41):
Abby, you called it out before. It's not a matter of if you'll be hacked or one of your vendor partners will be hacked or disrupted. It's a matter of when, and that's why we think the shift really needs to be around cyber resilience, not just cybersecurity, can't forget about that, but cyber resilience. How can you continue to operate in the event that you are hacked or you have some sort of outage in your system? So what does your continuity strategy look like? What does your resiliency look like? How can you ensure that you can continue to operate in this environment if you do have outages?

Abby Burns (23:12):
Which you're going to right? The majority of healthcare organizations had some sort of cyber event last year. I'm wondering here where AI fits in because AI is something that is already permeating every part of our industry. I'm kind of two minds here. One, I can see a world where great AI tools provide more cyber resiliency. By the same token, as hacks get more sophisticated, and this would be bad actors versus accidents, they're more difficult to defend against the more sophisticated they get. So how does AI fit into this conversation?

Natalie Trebes (23:47):
I'm sure there's all sorts of AI aspects to the hack and defense side of this, but I think AI really fits in a broader way here in terms of all of the different applications we are bringing it into in the healthcare industry, whether it comes to treatment decision-making or scheduling or documentation. There's all sorts of applications there. And so it is this desire, the explosion of technology and the desire we have in healthcare because of all of our longstanding operational and strategic needs to harness the potential here. When you do that, you are opening up the door to more and more vendors accessing data, more transmitting of data and mining of data. And so I really view AI as something that is accelerating the vulnerability, but because we want to accomplish amazing things with it in healthcare for the purpose of providing better care more affordably and more efficiently.

Abby Burns (24:51):
So essentially that tension between big potential reward, but also persistent risk of healthcare data, it applies to AI and use of AI tools here as well.

Natalie Trebes (25:03):
Yeah, that's right. And we've long had this pile of big data growing and growing and growing exponentially, and it's unstructured and we're just dumping it every which way. And there's billions and billions of records being created at record pace. Something has to sort through all of that. And so AI, I think, has offered us the potential to turn things that aren't structured into structured data that we can work with to create data that did not exist before to process through all of that. And so helping us get from here's a mountain of things we don't understand to here's something tangible that you can use in your workflow and your care with patients, that is where AI I think fits into the conversation.

Abby Burns (25:47):
Well, Max, Natalie, I know we just covered a lot. We are just getting started. We're going to take a break and we'll come back with another part of the conversation all around health systems and the policy landscape. Thanks guys.

Natalie Trebes (26:03):
Thank you.

Max Hakanson (26:03):
Thank you.

Abby Burns (26:10):
What I'm taking away from this part of our conversation is that leaders need to pay attention to the power evolutions taking place both within and outside of their own sectors. It can be really hard to look past the pressures that we're facing within our own industries, but the decisions made in one sector of the industry will definitively have ripple effects on the rest of the industry. So we need to open our eyes to those as well. We'll be back with more next week because remember, as always, we're here to help. Next week on Radio Advisory, when we're talking about 2025, we can't ignore the elephant in the room, pardon my pun, the policy landscape.

(26:48):
That's why I'm bringing back Natalie Trebes and Max Hakanson to shed some light on the future of the care delivery system. New episodes drop every Tuesday. If you like Radio Advisory, please share it with your networks, subscribe wherever you get your podcasts, and leave a rating and a review. Radio Advisory is a production of Advisory Board. This episode was produced by me, Abby Burns, as well as Rae Woods, Chloe Bakst and Atticus Raasch. The episode was edited by Katy Anderson with technical support provided by Dan Tayag, Chris Phelps and Joe Shrum. Additional support was provided by Leanne Elston and Erin Collins. Special thanks to Kennedy Goode, Kyra Caffrey, Sharon Yuen, Darby Sullivan and Prianca Pai. We'll see you next week..